Hello everyone, and welcome to the Healthcare Realty Trust third quarter financial results. My name is Drew and I'll be coordinating your call today. During today's presentation, if you would like to ask a question, you may do so by pressing star followed by one on your telephone keypad. If you change your mind, please press star followed by two. I would now like to turn the conference over to Ron Hubbard, Vice President of Investor Relations. Please go ahead.
Thank you for joining us today for Healthcare Realty Trust's third quarter 2022 earnings conference call. Joining me on the call today are Todd Meredith, Kris Douglas, and Rob Hull. A reminder that except for the historical information contained within, the matter discussed in this call may contain forward-looking statements that involve estimates, assumptions, risks, and uncertainties. These risks are more specifically discussed in the company's Form 10-K filed with the SEC for the year ended December 31, 2021, and Form 10-Qs filed with the SEC for the quarters ended March 31, June 30, and September 30, 2022. These forward-looking statements represent the company's judgment as of the date of this call. The company disclaims any obligation to update this forward-looking material.
The matter discussed in this call may also contain certain non-GAAP financial measures such as funds from operations or FFO, normalized FFO per share, normalized FFO per share, funds available for distribution or FAD, net operating income, NOI, EBITDA, and Adjusted EBITDA. A reconciliation of these measures to the most comparable GAAP financial measures may be found in the company's earnings press release for the quarter ended September 30, 2022. The company's earnings press release, supplemental information, and Form 10-Q are available on the company's website. I'll now turn the call over to Todd.
Thank you, Ron, and thank you everyone for joining us for our third quarter earnings call. First, I'd like to say how delighted we are to welcome Ron to Healthcare Realty. Many of you know Ron from Duke Realty. He joined us just three weeks ago, and we look forward to a long and successful partnership. Ron will be with us at Nareit next week. Turning to the third quarter, we're pleased to report Healthcare Realty's first results on a post-merger basis. I'd like to thank my colleagues for producing solid operating results while balancing the extra work related to integration. We're really just getting started, but what's encouraging to me are some early successes. G&A synergies are well ahead of schedule. Occupancy is improving steadily, and the development pipeline is really strong. These trends are especially helpful in a challenging capital markets environment.
Debt costs have risen sharply, both underlying rates and credit spreads. This is true for unsecured debt for public issuers, as well as secured financing for private borrowers. On top of this, most banks have pulled back on their funding. The combination of higher rates and less availability of debt financing has put everyone in price discovery mode. Right now, debt costs are serving as a floor on cap rates to avoid negative leverage. For MOB transactions, we see debt costs running in the high fives to the mid sixes. At the moment, MOB cap rates are running about the same level. In the last three months, we've made tremendous progress on our top priority of asset sales.
We're pleased to report dispositions approaching $1 billion so far, with a clear path to reach $1.1 billion at an overall cap rate of 4.8% by year-end. I'd like to commend my colleagues who worked tirelessly to accomplish this remarkable outcome in the current market environment. Moving forward, we can afford to be more patient. We currently have a lot of lines in the water. You'll see us sell assets selectively where it makes sense strategically and financially. Any proceeds we generate can be accretively reinvested into development projects, selective acquisitions, or opportunistic stock repurchases. Another top priority has been integration and organizational realignment. We've realized nearly 50% of expected G&A savings moving into the fourth quarter. We're ahead of schedule and on our way to realizing full annual G&A synergies of $33 million-$36 million.
Operationally, we have the opportunity to boost NOI by even more than G&A savings. To capture this upside, our initial focus has been to realign our leasing and operations teams. Our property management and maintenance teams are staffed much more efficiently to deliver excellent service. Our dedicated project management team is focused on accelerating build-out times, increasing the speed between lease execution and rent commencement. Our leasing platform is also fully realigned. We're leveraging the brokerage model that has worked so well for Healthcare Realty and applying it to the legacy HTA properties. We're poised to capture leasing momentum as the largest owner and operator of medical office properties. Healthcare Realty's top 15 markets comprise 60% of total NOI. In these markets, we own an average of 31 properties totaling about 1 million sq ft or more.
With unmatched market scale, our leasing directors and brokerage partners have the relationships and deep market knowledge to capture demand, accelerating Healthcare Realty's occupancy and rent growth. Our solid third quarter operating results largely reflect a mashup of legacy results without many operational benefits. We already see encouraging trends. Same-store NOI growth is accelerating, led by 50 basis points of year-over-year occupancy gains. We also see a meaningful increase in our development and redevelopment pipeline with the potential for much more value creation. Kris and Rob will touch on several areas where we have the opportunity to leverage our cluster model and enhance operational scale to accelerate growth and create value in the coming quarters. As I reflect where we are post-merger, I'm pleased to say we're ahead of our own internal expectations. Looking ahead, we're truly energized by the opportunities in front of us.
Healthcare Realty expects to generate the fastest growth in the medical office sector through occupancy gains, rent growth, and a growing development pipeline. I'd also like to point out Healthcare Realty's recent ESG efforts. We recently released our fourth annual corporate responsibility report, and we're also pleased to report our GRESB score of 80 points, a notable improvement over last year and the top in our peer group. Looking ahead, we have a meaningful opportunity to apply our successful ESG practices across a much larger portfolio. I'd like to thank my colleagues for making this a priority during a very busy time for Healthcare Realty. Now I'll turn it over to Kris for a review of financial results. Kris?
Thanks, Todd. This quarter was marked by great progress on the integration, especially G&A, where we saw early success. On an annualized basis, we realized $16.4 million of synergies, which is effectively 50% of our projected $33-$36 million of G&A synergies. This is double the savings we originally projected to generate in the quarter. We expect to realize the remaining 50% of G&A synergies evenly over the next three quarters. Now before getting into specifics on earnings, I would like to point out that with the merger closing on July twentieth, third quarter financials represent only a partial period contribution from HTA. In the supplemental report posted this morning, we also provided pro forma financials to show the full quarter impact of the merger.
In addition, to help people better understand results, we provided run rate data showing the impact of the ongoing asset sales, seasonal utilities, and remaining G&A synergies. The pro forma FFO per share for the third quarter was $0.39, and run rate FFO per share is $0.40. These results include almost $12 million or over $0.03 per share of non-cash merger related mark-to-market interest expense. We also experienced approximately $0.01 of increased cash interest expense due to rising interest rates in the quarter. We provided a table on page 5 of the supplemental detailing the adjustments for run rate FFO, FAD, and EBITDA. Please note the run rate numbers do not include any future growth assumptions. Looking at the balance sheet, run rate pro forma debt to EBITDA is 6.3 times.
This assumes the full repayment of the asset sale term loan, which had $423 million outstanding at September 30. Subsequent to quarter end, an additional $136 million of asset sales have closed. We expect the remaining asset sales to repay the term loan to be closed before year-end. At the end of September, we had fixed interest rates on 81% of outstanding debt. This excludes the soon-to-be-repaid asset sale term loan. Subsequent to the end of the quarter, we completed $250 million of additional interest rate swaps, bringing our current fixed debt ratio to over 85%. We expect to keep our fixed to floating ratio in this range. Turning to same-store performance, we've seen accelerating growth.
I want to point out that the same-store results include the combined legacy and HTA portfolios for all eight quarters shown. The same-store properties represent 83% of total portfolio cash NOI. Notably, the combined portfolio has generated sequential improvement in same-store NOI for each of the last four quarters. Same-store NOI growth at 2.8% in the third quarter is up from 2% a year ago. We expect to build on this momentum moving forward. Strong revenue drivers helped offset a 9% increase in operating expenses in the third quarter. The expense growth was driven primarily by utilities, which increased 16%. We're generally insulated from the higher than historical operating expenses with 92% of leases having expense passthroughs. This drove an 11% increase in operating expense recoveries year over year.
Looking ahead, the merger provides opportunities to improve overall utility expenses. For example, we've installed real-time electricity monitoring in about half of the legacy HR properties. As indicated in our recently filed corporate responsibility report, we've seen an average 8% reduction in energy consumption after installing these systems. Comparably, none of the HTA properties have real-time electricity monitoring. We currently have over $10 million in sustainability capital projects underway. These projects will help reduce overall energy usage and cost. Shifting back to rental income, same-store third quarter revenue per occupied sq ft increased 4.4%. This growth was driven by 50 basis points of year-over-year occupancy absorption and cash leasing spreads of 2.9%.
Looking ahead, same-store revenue is poised for accelerating future growth, with escalators for leases executed in the quarter being 16 basis points higher than the portfolio average escalators of 2.64%. In particular, we have an opportunity in the legacy HTA assets where escalators are running more than 50 basis points below legacy HR. Cash leasing spreads are about half of the HR assets. We expect to accelerate the growth in the escalators and cash leasing spreads in the legacy HTA assets. This will drive compounding NOI growth. Now, I'll turn the call over to Rob for further updates on leasing and investment activities.
Thank you, Kris. Since closing the merger with HTA, Healthcare Realty has sold 29 properties for a total of $922 million at a 4.6% cap rate. This includes $489 million closed since we last reported. We expect to close the balance of the transactions related to the special dividend by year-end, bringing the total to over $1.1 billion at a cap rate of approximately 4.8%. As Todd alluded to, the market for medical office buildings remains in a period of price discovery, likely for the remainder of this year and into next. This has largely been caused by a significant increase in the cost of debt. This increase seems to have created a floor on cap rates around the 6% level. It's also become more difficult to secure financing, especially for larger portfolios.
Transactions greater than about $100 million often need to be syndicated with multiple lenders, increasing the complexity and cost of the financing. As we move into our next phase of asset sales, we remain active but measured as we navigate this period of price discovery. We are testing the market with multiple smaller offerings, having a wide variety of characteristics to gauge where relative pricing is strongest. We will consider opportunistic sales when it aligns with our long-term portfolio strategy. Any proceeds can be redeployed accretively into our development pipeline or select acquisitions. Development remains an area where we see the prospect for meaningful investment with higher yielding risk-adjusted returns. Through the merger with HTA, we picked up two active developments in Orlando and Raleigh with a combined budget of $114 million.
Together with legacy HR projects, we now have $209 million of active development and redevelopment underway. We expect to fund approximately $20-$25 million per quarter for these projects during 2023. Our long-term embedded development pipeline has also increased through the merger to approximately $2 billion. From this embedded pipeline, we have identified over $300 million of near-term prospective projects. These are made up of opportunities where we have a high degree of control of both timing and project economics. As an example, we inherited a land parcel from HTA adjacent to a hospital in Houston. We are engaged in discussions with the hospital and physicians to lease space in a new 112,000 sq ft MOB. Another example from the legacy HTA portfolio is a redevelopment.
This project includes 2 60%-occupied MOBs on another hospital campus in Houston. A change in hospital ownership is reinvigorating investment and demand on the campus. Identifying and executing on redevelopment opportunities like this creates a path to increase occupancy across the legacy HTA portfolio. On the leasing front, we have made considerable progress transitioning legacy HTA's portfolio to our own proven leasing platform. We reconfigured our regional leasing coverage, and each of our directors of leasing now has a more efficient portfolio to manage. We have also transitioned almost 75% of the legacy HTA portfolio to third-party brokers. A key element of our model includes the use of third-party brokers, providing enhanced deal flow and greater market knowledge to increase portfolio occupancy. The response from our brokers and hospital partners to this transition has been incredibly positive.
For example, a health system in Dallas reached out to our local team and expressed a desire for more collaboration around their strategic initiatives since we now own more buildings on their campus. As we've experienced with other hospital-centric clusters, having a deep relationship with the hospital will drive demand for our MOBs. The brokerage community is energized by having more leasing options. We've had several of our brokers in top markets articulate how the increased scale and variety of offerings will help them generate greater leasing velocity and improve our occupancy. The momentum generated by this transition will serve as the foundation for improving occupancy across the portfolio. Notably, bringing the combined portfolio's current multi-tenant occupancy of 85%- 90% will generate over $57 million of annual NOI. This will take multiple years, but generate significant value.
As Chris mentioned earlier, there's further upside from improving key growth drivers such as cash leasing spreads and annual escalators across the legacy HTA portfolio. I'll note we've successfully achieved this time and time again with many of our acquisitions.
I am proud of the progress made this past quarter to integrate the two portfolios and our teams. Through this process, we are identifying additional areas for future growth. Executing on these will generate substantial upside for our shareholders. Drew, we're now ready to open the line for questions.
Thank you. We will now start today's Q&A session. If you would like to ask a question, please press star followed by one on your telephone keypad now. If you change your mind, please press star followed by two. Our first question today comes from Nicholas Yulico from Scotiabank. Your line is now open.
Hi. Yeah, it's Nicholas Yulico, Scotiabank. So I guess just in terms of, you know, first, Kris, just from a modeling standpoint, can we get the rate on the new swaps at the $250 million, and also just thoughts on, you know, why not do even more swaps to reduce the floating rate exposure?
Yeah. That $250 million is a little over 4%. I think right at 4.12% is the all-in rate on the swaps with a term between 4.5 and five years. What that does is it brings us a little over 50% fixed on all of our bank debt. As we look at it's really kind of taking a true hedge position as opposed to saying that we know exactly where interest rates are gonna be for the next you know four years, which is the average remaining term on all of our bank debt. Certainly that's something that we'll continue to watch and monitor.
You know, if we wanted to, we could tip it up a little bit, but I'm not sure that you wanna go to 100% fixed right now and you know, not be able to recognize the back end of that forward curve when hopefully rates will start to moderate.
Okay, great. Second question is just on, you know, I appreciate all the disclosures you gave on, you know, pro forma, FFO, FAD. You know, if I look at page five of the sup where you have that, sort of adjusted run rate FAD of around $0.33 in the third quarter, how should we think about that as sort of the building block, you know, for next year? I guess I realize it was done a while ago, but originally when you put out some of the, accretion numbers on the transaction, you know, earlier this year, you talked about, you know, $1.48, $1.49 2023, you know, combined FAD, realizing interest rates have, you know, gone out of, you know, favor for that number right now.
you know, I'm just wondering if there's anything else relative to that, you know, initial number you put out earlier this year to think about as we're, you know, thinking about next year. Thanks.
Nick, this is Todd. I'll jump in. Maybe Chris can add to it. Clearly, as you just pointed out, the big wild card has been interest rates, and so that's had a pretty big impact on you know all debt costs. As Chris just talked about, managing sort of the exposure on that is key. The merger was certainly a benefit. Gave us a larger balance sheet. Frankly, moved us to more fixed than we were independently at Healthcare Realty. There was some benefit there. That's what's really causing, you know, a 2023 outlook to be different than it was, you know, three, six months ago with rates changing that quickly. What we've tried to do here is just sort of start.
Really set the starting blocks for what you said, which is building upon that with the building blocks of growth versus sort of, you know, the headwinds we're all looking at with interest rates. I think for us, we view this as, you know, interest rates have not only impacted just your absolute cost of debt, but they also ripple through to things like acquisition activity, disposition activity, the types of accretion that you would normally have in those models. I think for us, you know, that's largely a pause beyond the asset sales that we're focused on today. In terms of future acquisition volume, we're not trying to project what that might be at this point. We need things to settle out, like everyone.
I think our view is really the building block, the key building block is what you heard all of us talking about, which is occupancy upside. Clearly, we have strong fundamental growth drivers that compound, you know, rental growth rates, cash leasing spreads, those types of things, but it's really the opportunity Rob articulated to generate significant NOI through occupancy upside. We kind of view that as, you know, 3%-5% growth on fundamental contractual escalations, cash leasing spreads, plus occupancy. The one headwind in that that Chris touched on, which is also a wild card, is inflation and operating expenses. The good news is we can still, you know, have strong same-store performance, but it can soften it if expenses aren't, you know, cooling down a little bit.
Those are the building blocks we think sort of 3%-5% operating growth, and then it's really kind of the question of interest rates. You know, what do you look at it with interest rates? Kris, you might touch on sort of how we think about, you know, every 1% change in interest rates.
Yeah. If you look at it right now, about a 1% change in interest expense, you know, reduces our overall growth by about 1.5%.
It's kind of those two building blocks are the main focus right now. Obviously, as the market settles out with price discovery, we can start to look back at things like, you know, does it make sense to be selling assets, recycling accretively to acquisitions? You know, at some point, does it make sense that cost of capital makes sense relative to acquisition cap rates, development yields, that kind of thing. We're kind of putting those pieces on the back burner, you know, in the current moment.
All right. Very helpful. Thanks, Todd, Chris.
Our next question comes from Austin Wurschmidt from KeyBanc. Your line is now open.
Hi. Thanks everybody. Todd, you highlighted the realignment of your leasing and operations teams, and I was just wondering if you could give a little bit more detail as to, you know, what exactly that means and why maybe they were separated historically as we think about sort of that occupancy opportunity that you've continued to talk about.
Sure. I mean, the realignment clearly is taking the two portfolios. There was, you know, nearly 70% overlap in markets, so that was obviously a huge opportunity to get more efficient, as Rob said, with our leasing directors and really give them more assets, quality assets in fewer markets so they can focus more on transactions in those markets and be smarter, accelerate those relationships with health systems. Then the same thing with brokers. I think the key difference was, if you think about it, we essentially pulled about half. We were able to kind of, sort of what I would say is take the top talent, the high performers of both companies on leasing and where it made sense geographically with their market knowledge, their relationships, and reorganize that.
If you recall, HTA had a very internal, internally driven leasing process, not really using brokers to represent the portfolio assets. That's a pretty big shift. Going to the Healthcare Realty model of using brokers, really getting access to all deal flow, as Rob described. That's been, you know, a real focus of ours, is getting the leasing directors, our employees aligned on their portfolios, getting the top talent there, making the most of that more efficiently, but then also getting brokers in place and really for all these HTA assets that did not have brokers. It's an organizational process, and I think, you know, in three months' time, it's been, you know, a really encouraging accomplishment.
I'm just curious if you can then kind of give us what the leasing pipeline looks like today. What's your thoughts on sort of, you know, near-term occupancy gains and sort of the signed but not occupied, you know, backlogs?
Sure.
On the combined portfolio?
Yeah, I think, you know, again, I mentioned that their operating results for the third quarter are just really largely a mashup of the two companies without a lot of this, you know, performance enhancement that should come from the combination. Encouragingly, you saw the last two or three quarters, Healthcare Realty's portfolio had been building momentum on occupancy gains. HTA's was lagging a little, but it was sort of pent up progress and improvement, and we're starting to see that come through here in the third quarter. That's encouraging. You saw that 50 basis points year-over-year. I think that's the baseline momentum that we're talking about that we think can continue to carry forward. It's really sort of what can all of the benefits of the merger do to accelerate that.
I think it's thinking, you know, how do we move 50 basis points to, you know, 75, 100 basis points year-over-year. That has a material benefit, you know, to the rate of growth on same store and the overall NOI growth, that 3%-5% level that I was talking about earlier. That's really what we're seeing. The leased but unoccupied, Chris-
Yeah.
You got that?
Yeah. It's just over 500,000 sq ft of leases that are in the process of build out. It ends up being about 1.5% of total sq ft.
Thanks. Then sticking kind of operationally, last one for me here is why are leasing spreads so much lower in the HTA portfolio? I think you said they were about half. How much of that spread do you think you can realistically close versus, you know, you know, HR's legacy portfolio? Thanks.
Yeah. Yeah. I think if you looked at, they were about half. I think if we look at where we've been running, we've kind of been running on average of about 3.5, and I think that's. With the realignment that we discussed in terms of more giving our leasing team more buildings, more square footage in a market, deeper relationships, and transitioning to that broker model, we think that we can close that gap over time and move that lower cash leasing spread that we're seeing in the HTA portfolio up to something that's resembles where we've been operating historically.
I think a big part of it, Austin, is too just a laser focus on that priority. That's been a huge real boost, I think, to Healthcare Realty for the last, you know, seveb, eight years, is really just being very focused on that. That's something that I think. It's not that HTA and other MOB operators don't look at it, but it's just we think we have a very well defined, you know, focus on that. I think our teams, as organized the way Rob described, are able to produce that. Again, if we're looking at something that's, you know, a little less than two versus something that's running 3-4, we think we can close that gap.
Now with so much overlap in these markets, the same brokers, the same leasing directors internally, we think we can take that focus and really lift that rate across the HTA portfolio.
Thanks, guys.
Thank you.
Our next question today comes from Juan Sanabria from BMO Capital. Your line is now open.
Hi. Just hoping to speak a little bit more about the dispositions. I was confused maybe a little bit by some of the numbers, Kris, you threw out there. I mean, it sounds like there's about $100 million left in dispositions, but there's still $400 million plus left on the term loan, so I just wanted to make sure I understood that correctly. Then secondly, I mean, what are the realistic prospects for further dispositions which you had previously highlighted, as a potential source to fund the buyback at this point. I mean, what's a good earmark for kind of expectations for 2023 as you sit here today, granted that there's a ton of uncertainty in the markets and where rates are going, but just curious on your thoughts there.
Yeah. I can touch on that. Basically, the way to think about it is the $423 million that was outstanding at the end of the third quarter has been paid down because we did have, after the quarter closed, we had an additional $136 million of asset sales that closed in October. We have another $100 million or so that are scheduled to close here in November, kind of leaving the balance there to get to the full pay down in December. That's kind of the progression on the asset sales and the pay down of the debt.
As you think about dispositions going into your second question on just expectations for 2023, I think that's something I would say, as you pointed out, it's a little presumptive to know what that would be for 2023, but I understand the modeling question. Before you will recall, we talked about a phase two, $500 million-$1 billion. Certainly, we're not in that realm. I think with what's going on in the market today, Rob describing sort of how we're looking at, you know, a lot of different smaller transactions in the market, you know, looking at something that maybe is in the, you know, $250-$300 million range is probably not an unreasonable, you know, spot to think about for the year.
I think that's gonna evolve quarter by quarter as price discovery unfolds. You can even see in some of the assets that Chris just went through in November and December. I mean, those cap rates. I mean, we had the luxury that we had sold the lower cap rate assets, you know, sooner. We were working from a 4-6, and we had a little room, you know, to sell at cap rates that are, you know, maybe 6 or so on average here more recently. I think that's kind of where your head has to be if you want to sell assets. It's almost quality be damned. It doesn't matter. You're just not gonna find many people willing to pay too much. I mean, maybe a few all cash buyers will.
If there's something unique about the property, you know, it's unstabilized or something, that you could get a lower cap rate. I think for us, we'll just be measured. I think that's the word. Patient and measured are the words we're using, is just kind of feeling our way through this price discovery. I think with such a huge portfolio, we've got a lot of opportunity to really discover early where price, prices are and make the best of that. We think we've got lots of accretive choices to redeploy that capital.
Then you flagged $2 billion kind of enhanced or bigger redevelopment pipeline that you could maybe do $300 million. Just curious on the timing of that $300 million and the kind of cadence of capital spend and the funding for that. Then kind of as part of that, what yields were you expecting, if you could just benchmark that to kind of the 6% you flagged as your cost of debt to get a sense of how accretive that could potentially be for the company?
Sure. This is Rob. On the, you know, as I mentioned earlier, for 2023, you know, we're looking at, you know, about $20-$25 million of funding, and that's really related to the current pipeline. As you move to that $300 million prospective pipeline, I'll point out, you know, those. What's really encouraging about those projects is that we control those either through we own the land, we have the relationship with the developer, something that really allows us to be measured and to work with the health system and physicians in terms of planning, and generating the right economics for us.
I think as we think about timing of that, we've laid out sort of I think the first projects would possibly start towards the end of 2023 and then really move into 2024 before we would have to start funding anything under this. Those are our expectations right now. Those projects are still early. We're still in the planning phase. We're having great dialogue with those health systems and those physician groups. As you guys know, and as we've communicated before, these types of developments take time. The quality developments take time. We think that, you know, into 2023 and into 2024 will be where we'll have to start thinking about funding those.
You know, probably the $20-25 million next year, maybe that ticks up into that $25-50 million dollar range per quarter for 2024. In terms of yields, yeah, you said you mentioned the 6% cap rate that we're seeing right now, kind of sort of earmarking as the cost to sell assets, and we really view that as a proxy for our cost of capital. You know, traditionally, we said about 100-200 basis points over our cost of capital is where we wanna be on developments.
You know, for that group of that $300 million of developments and redevelopments, that's the range that we're targeting, kind of that, right now, that 7%-8% initial yield, stabilized yield on those deals. Certainly, as I mentioned, the control over those projects and that we can control the timing and really manage economics, because we control the projects. As we move forward, if the environment shifts, if costs rise, if capital costs change, then we can certainly be mindful of that and adjust. That's the range we're looking at right now.
Thank you, guys.
Our next question comes from Michael Griffin from Citigroup. Please go ahead.
Thanks. It's Nicholas here with Michael. Maybe just on those asset sales from the quarter at a 4.6% relative to where cap rates are today. Is that just a timing mismatch that you guys got the timing right there? Or is there anything about those assets, either from an occupancy or near-term rent growth opportunity that makes the 4.6% not really a stabilized cap rate?
No, I mean, there's certainly a variety of cap rates within that. I mean, within the 4-6, I would say there's some things. There are maybe one or two that have a little bit of lower occupancy, as you point out. In fact, a couple of or group of assets we sold into the JV with CBRE would fit that description. Again, that's relatively small in the mixture. I think the overall occupancy is high 80s% of everything we've sold so far. It's not, you know, a material difference. You also have some assets, you know, some deals that are, you know, in the 6s, for sure. It's a range. We had, you know, a few people, you know, stepping up to some very aggressive cap rates that reflected, you know, the environment at that time.
Certainly nothing material that would say, "Oh, that 4.6% is materially higher on a stabilized basis." Certainly 4.6% is just a pit stop on the way to 4.8%. It's not as though we think 4.6% is, you know, the norm, even then. I think 4.8% is really still, you know, where we're focused. I think if you use the run rate table, you can begin to sort of see how, you know, that's shifting a little higher in some of these later sales, but that was kind of by design, and we're very glad to have some of that lower cap rate, those dispositions completed and behind us.
Thanks. That's helpful. Just maybe on buyer underwriting or how you're even thinking about underwriting from an IRR perspective. Obviously, the cap rates have moved up. Is there anything from a growth perspective that may have changed over the next three to five years would you think, either from a transaction IRR standpoint?
Are you talking about on sales or how we look at IRRs for what we're buying?
How you look at it and how you think a buyer would be. You know, either how
Yeah
You're looking at acquisitions if you were underwriting today or just?
Yeah
Kind of broadly how the broader market is underwriting things. Just trying to think about how changes have occurred over the last six months. Obviously, cap rates are up.
Yeah.
Trying to get a sense of where IRRs are going.
That's the big one, Nick. I mean, for sure is the cap rate. If you think you know, the other big moving part would be, yeah, the growth profile that you would expect. I think broadly speaking for, you know, the MOB business, I think people are still gonna be in the 2-3 range when they think about growth, and then it's gonna come down to the specific situation and say, what are the contractual escalators? What's the occupancy? What's the ability to drive that based on market rents and where you are relative to that? What's the CapEx side? I mean, that's an important piece as well. I don't think I see anything that's fundamentally shifting the landscape beyond cap rates.
I think people are sort of trying to wrap their head around, you know, the old bogey of IRR was in the 7% range on lever. You know, is that now 8% because cap rates have moved, you know, 100 basis points? I mean, that's where I think price discovery is focused, and I think maybe the one nuance to us, which you've seen us do for some time, is we do look at the growth rate a little differently because of our cluster model and our market scale. We do think we can go in there and it's kind of all the things we just talked about.
I mean, we're looking at that same idea that we can accelerate growth from what I would call the low end of the 2%-3% range to the 3% range or better, especially if you add occupancy in the HTA legacy portfolio. Even the HR portfolio getting strengthened by enhanced scale. I think we do look at it, you know, where there's opportunity to accelerate growth, but I think broadly speaking, people are still looking at 2%-3%, and I don't see sort of a systemic, you know, challenge to that 2%-3% concept.
Thanks. Appreciate it.
Sure.
Our next question comes from Richard Anderson from SMBC. Please go ahead.
Thanks. Just a quick clarification first, to Kris. You said 1%, a 1% increase in interest expense creates a 1.5% impact on FFO. Did you mean a 1% increase in interest rates?
Yes, I probably misspoke. Technically, we should be saying one percentage point, 100 basis points, not 1% change.
Right. One percentage point, right.
Yes, I think you got the idea.
Yeah. Okay. I thought I just wanted to make sure I understood that. The side-by-side I did myself before the call, you know, what you guys look like from a leasing and escalators perspective relative to the combined company, you went through that in some detail. One part that struck me as interesting was today, the combined company, 26% of the portfolio is between 0% and 3% escalators. You guys were exactly 0% in that range as a standalone company. I imagine it's gonna take some time to improve upon that statistic, get that 26% up into the upper echelon category. When you think about the timing of all these escalator improvements to the portfolio, cash leasing spreads and so on, is that.
It sounds like it's gonna be like a 3- or 4-year type of, you know, kind of situation. Is that fair to say?
Well, I think in terms of to your point of being able to capture all of it, yes, it does take multiple years. If you look at our weighted average lease term, that has to flow through. You know, in any particular quarter, you know, when we lay that out in terms of what the spreads are in each quarter to give a bit more detail and show some that distribution behind the average. It does move around from quarter to quarter. The consistency that you have seen is that the fat part of the distribution is that 3-4. That's still there.
You know, as you know, Rich, one of the things that we've talked about is we've had a focus on this for the last 7-8 years, is changing that distribution, reducing the amount that are negative or that 0-3, so that you can let the fat end of the tail, the strong end at the over four, which some of those are even double digits.
Really start to show through in terms of the average. I think that's what's gonna be our focus and you know the expectation is that we're able to continue to improve that over time which you know. I think it goes back a bit to what Rob mentioned that this is something that we've been doing on acquisitions for years. What we see in the HTA portfolio is not dissimilar from what we've seen in other properties and other portfolios we've seen historically. We're very encouraged and we think that there's a lot of value that can be unlocked. As you said it's a multi-year process to capture all of it.
Rich, I think you're right in observing that that takes a little time. You know, that's getting organized first. I think the key phrase that our head of leasing would use would be deal discipline and just having a rigorous process around that and a laser focus on the objective. I think that's just something, as Chris said, has for us unfolded and been very effective. You know, it's organizational, but it's also, you know, leadership. It's deal discipline. I think that's what we're encouraged by, that we see a huge opportunity to bring that to bear on a, you know, significant portfolio. Frankly, some tailwinds that can help us lift that across both portfolios as well. That's...
As we said, the mashup this quarter, as you just pointed out, presents some interesting comparisons or contrasts to standalone HR, and that's really where the opportunity lies.
Okay. On the cap rate discussion and the 4.8% average that you're expecting on the $1.1 billion, is there anything definitional about that cap rate and what you're saying from, you know, the 6%-ish type range that you're seeing in the market today? I assume the 4.8 is a backward-looking number. Is that correct?
No. It's really. I mean, both are really thinking about that first year, with not a lot of, you know, lease up in it. We're pretty disciplined about how we think about. When we talk, we talk about a cap rate on an acquisition, we talk about the first year NOI, you know, starting now, and it's the same thing on this 48 that we're talking about. The only. I mean, you can kind of pick it up in the run rate table in the supplemental. We're talking cash. We're not talking straight-line rent, because that can be a wild card and unknown. But I would say on average, our typical difference between the cash cap rates we're talking about and the non-cash with straight-line rent, maybe 20-30 basis points.
In the run rate table, it's more subtle than that because we sold quite a few assets early in the quarter, so there wasn't really much, if any, straight-line rent booked. There's actually a much smaller difference. I think the 4.8% goes to like a 4.9%, if you kind of look at the run rate table. It's more subtle than that.
Across all $1.1 billion.
Yeah, across all of it.
Okay. Last for me, the other thing when I did my side-by-side is you know, you provide your components of FFO guidance. You're not doing that now, obviously. A lot of movement around. Do you think, you know, by this time next quarter, you'll be able to resurrect the components of FFO, you know, of the combined company, or is that gonna take some time?
You know, I won't say we're committed to it by next quarter, but I think conceptually, we like it. It helps us have better conversations with you know, you and your peers, investors, you know, the market in general. I think some form of that will come back, whether it's next quarter or the following. But it makes sense coming into the beginning of 2023. We'll just have to look at that. I think, again, just with where the market is, you know, some of those things are a little tougher. You might see us do a little more operationally focused. You know, the part about predicting exactly how many acquisitions you're gonna do in the year and dispositions.
Right.
that part, you know, maybe that holds for a little longer. We're
Yeah, understood.
Yeah. No, no big promises, but I think directionally, we favor that.
Okay. Sounds good. Thanks, everyone.
Welcome, on.
Our next question comes from Steven Valiquette from Barclays. Please go ahead.
Great. Thanks. Good morning, everybody. You know, there was a lot of discussion, you know, back around the time of the merger and announcement of merger close around revenue synergy potential from the deal. Just a couple questions around that. You know, I guess first with the you know, that long-term embedded development pipeline of $2 billion that you talked about. Is there any part of that you could earmark as, you know, incremental opportunities specifically related to the merger? Or would all the incremental still be forthcoming and would be in addition to that $2 billion? That's the first question, then I got a couple follow-ups based on the answer on that.
Yeah. This is Rob. I'll hit your first question there. I think that, you know, when we did the merger, we looked at the two pipelines, and our embedded pipeline was about 1.2-1.3, and I think their pipeline at the time represented about $600-$700 million. So if you take the $2 billion, that's really what we see as sort of the mashup of the two pipelines. We really believe that there's more behind that. We're just getting into kind of understanding, you know, finding opportunities within the portfolio for redevelopment. I think I cited one in my prepared remarks in Houston, two buildings there that are about 60% occupied.
We view that as an opportunity to redevelop those properties and drive occupancy, giving the favorable environment on that campus. We think there's more gonna be more behind that. As we get in, we will add to that $2 billion and grow that $2 billion. We're optimistic and excited about the opportunities that we have ahead of us.
Okay. For the $300+ million of near-term opportunities, I mean, you show that list on page 15 in the supplement, so it makes our lives easier to track all that. I guess the question is, since we're not really in the greatest operating environment for health systems as a whole right now, is there any chance that some of that $300+ million could be canceled, or is that all contractually locked in? Notwithstanding the tough operating environment, it sounds like you still think that the $300+ million of near-term opportunity could actually grow based on what you see. Just want to confirm, you know, those views just in light of the overall operating environment for health systems. Thanks.
Yeah. I'd touch on your first question. I mean, with regard to the $300 million, certainly those are. We're not locked in in terms of contractually with those systems to do anything. But the majority of those projects are associated with growing health systems that have growth initiatives in front of them, and they're aligned with leading hospitals in, you know, markets like Denver, where they have a real initiative to grow. And it's part of their ongoing kind of market share plan. Certainly some of these could move around, they could be delayed. Certainly they could be canceled.
Right now we're having deep dialogue with most of those on projects on that list. We're very encouraged by what we see going forward and have a high degree of confidence in those projects.
Yeah. I think, Steve, I might touch-
Okay.
On your comment about the health systems and the environment. I think, you know, you follow this closely, but certainly health systems are dealing with a pretty historic, you know, labor cost problem and availability problem, no doubt. Also just, I mean, following some of the public companies and that have reported, you know, margins are still for the better hospitals and systems, margins are still strong, but they're, you know, being challenged by those labor and cost increases everywhere. No doubt. I think the stronger systems, you know, have the wherewithal to stomach some of that. The plentiful cash on hand that a lot of not-for-profit systems have, you know, the credit ratings they have, but their cost of capital is going up, too.
In many ways, I think what we can look at is the actual day-to-day conversations we're having are very productive. I think it's gonna create opportunity that these health systems may need to lean more into folks like ourselves to execute on their strategic initiatives and rely on third-party capital and operators to get things done because, you know, their old days of super cheap debt, which is their, you know, their main source of capital, just is much more expensive today like everyone. I think we see opportunity there, but we're certainly mindful that they have challenges of just, you know, putting together those operating plans and initiatives for their growth plans because of staffing challenges. I think it's, you know, kind of like the industry environment.
It's navigating here, you know, quarter by quarter to see how it goes.
Okay. All right. Appreciate it. Thanks.
Sure.
Our next question comes from Daniel Bernstein from Capital One. Your line is now open.
Hi. Thanks for taking the questions here. I had a question here on the CapEx, which seemed a little bit elevated in the quarter, although I think in your supplemental you said it would come down to about 16% of NOI, which still seems a little bit higher than what I was modeling and expecting. Just wondering whether you've changed some of your thoughts on the amount on CapEx relative to FAD guidance and, you know, is there any other changes in there relative to, say, leasing activity or CapEx needs which in that legacy HTA portfolio? Thanks.
Yeah. Dan, as we look at it, you know, CapEx is something that moves around from quarter to quarter. It's, you know, when we typically talk about it, we typically look at it on a trailing 12-month basis. With the merger that's a little bit more complicated. Digging behind it, if you look at a year to date, between the two companies, we're running just under 16%. That's the reason we use that number as well, is that's what we used inside of our initial underwriting of the merger of what we expected the combined maintenance CapEx to be. You know, now that's kind of a long-term trend number.
If we're seeing, you know, real benefits in terms of absorption on occupancy and we're spending capital there, you know, that's certainly growth capital that's well worth it. You know, either side of that 16%, and like I said, it's gonna move around from quarter to quarter. Fourth quarter is typically one of our higher quarters. It's just things wrap up. You know, that I wouldn't think that would be unusual next quarter either.
Okay. Are potential tenants or signees of the leases asking for additional TI relative to, you know, I guess increasing leasing spreads and increasing rents? Just, you know, we've seen that in the life science space a little bit. Just wondering if you're seeing that in the MOB space as well.
You know, trend-wise, it's not showing up. I mean, if you see our stats that we provide in our supplemental, we even combined with HTA this quarter, it really is not ticking up much. I think situations that involve redevelopment, like Rob articulated, certainly that's a little different game, and so you're gonna see more significant dollars to reinvigorate, you know, some buildings maybe that have been lagging. Just in the normal course that goes into maintenance CapEx, I would say we're not seeing any particular trends that suggests that. You know, we've been through some elevation of that in past years, but don't see that as a, you know, new trend that suddenly that's gonna be on the rise. You know, it's case by case with tenants.
I think a lot of health systems, you know, aren't looking for a lot of, you know, capital and relying on us where it's kind of split that way, whereas the physician side might be from time to time, a little more elevated, so it kind of balances out. I wouldn't say that there's a remarkable trend worth pointing out here.
I will say that our leasing process and the way that we run the analysis on each of our leases is an IRR-based analysis and, you know, with hurdle rates. You know, if you are looking for more TI, we are gonna balance that with making sure we're getting the return on it through higher rents.
Of course. One other quick question here. It seems like your development pipeline is fairly robust, but I would think, you know, if you're a merchant builder or a regional builder, you're gonna have trouble making the math work for development. Are you seeing any delays in development outside of your portfolio, just broadly for the MOB space or any maybe transaction development deals that somebody else was going to take and develop that maybe that have come your way or somebody, you know, the hospital's inquired whether you want to take it or not? Just trying to see, maybe development in the industry will be a little bit subdued relative to where demographics are.
Yeah. Dan, this is Rob. I think that in terms of developments coming our way, I mean, we're certainly out there in the market. We're, you know, dialoguing with all of our health system partners. We have seen some deals that are out there that are probably headed in the direction that you're articulating. It's, you know, somebody cut a deal at a lower yield on cost and, you know, debt markets have shifted, and now they're upside down in terms of the negative leverage. You know, certainly going back to the health system and having that conversation is a tough one.
I think that we could see some opportunities there that'll come back our way at adjusted yields that better represent today's cost of capital. Certainly haven't seen a ton of it yet, but we think that there's gonna be some opportunity out there.
Yeah. Dan, it's early, but I think you're exactly right. We saw a little bit of that, you know, in the prior cycle 10, 12 years ago.
Mm-hmm.
I think you could see it again because, you know, debt costs are such the driver of these third-party private developers, and that's just wreaking havoc on their economics and maybe some of the promises they made. It's early, but I think that is a bright spot for us.
I do think that, just to add to that, I do think that's what's unique about our pipeline, is that we control those opportunities. You know, if we can manage the economics, we can, you know, kind of work with the systems, because we own the land in many cases that's adjacent to the hospital. I think that's a key difference between us and a merchant builder.
Yeah. That's great color. Actually, if I could add, I'm sorry. Can I ask one more here or?
Sure. Go ahead.
Sure. How are you thinking about the trade-off between, you know, maybe that future yield on development versus buying back your stock here? I mean, the implied yield clearly over 7%. You know, obviously the market's doing some kind of pricing discovery, but it seems like your stock is fairly attractive here.
Yeah. I think the difference there is time horizon. If we find ourselves with excess proceeds and, you know, just making up a number, but let's say we had an extra $100 million of proceeds and, you know, Chris is looking at his choices and saying, you know, "What's the best?" In the near term, that might be stock repurchases. As we look further down the line, I think clearly you start looking at things like development because those can, as Rob said, be at yields that are even higher than that 7%. But, you know, buying back the stock has growth implications in it too. You know, and we like those prospects. I think we would look at both very carefully.
Stock repurchases are more immediate and known, whereas development is much more of a long-term planning process. We think of it more as what Rob said, of, hey, $20-$25 million a quarter, and kind of ticking that up as we go into the latter part of 2023 and 2024, assuming the environment, you know, is comfortable. It's really about excess proceeds from dispositions. We, you know, we'll see when we get there.
Maybe depends on that $500 million-$1 billion, whether that materializes or whether it's a smaller number.
Exactly. Yeah.
Okay. All right. Thanks. That's all I have.
Our next question comes from John Pawlowski from Green Street. Please go ahead.
Thanks. Maybe just a follow-up to your comments right there, Todd. Could you just give us a sense for the debate of buying $95 million in acquisitions versus buybacks? It seemed that you did have some dry powder, and you chose acquisitions over share repurchases. Any color on that debate internally would be great to hear.
Yeah. I mean, that's really a rearview mirror issue, and it's not how we think about it going forward. I mean, those were things that were committed much earlier, obviously at cap rates that made more sense at the time relative to the cost of capital. I think that framework's just completely shifted in recent times. I think you will see the quarterly pattern be, you know, next to nothing. We might, you know, buy one small asset or here or there if it fits into a strategy around a hospital. But you're not gonna see large acquisition volume in the fourth quarter, for sure. It's a very different conversation today than it was, you know, three months ago, four months ago, even two months ago.
Those are all, as we said, really kind of almost defensive moves around clusters that we have and opportunity we see with health systems that we don't wanna lose. You know, if you look at the detail in the third quarter, pretty small individual deals. I mean, we're certainly not looking to move material amounts of capital. Again, fourth quarter, you won't see anything like that.
Okay. How is same-store NOI growth in the legacy HTA portfolio trending versus expectations you had embedded in prior FAD bridges?
Yeah, no, it's following the trajectory of what's going on with leasing across both portfolios where occupancy is rebounding there a little bit. I think as Todd mentioned earlier, a little bit behind us in terms of that rebound. You know, they've been, if you look back over the last year or so, they've been running more like 1%. You know, that's starting to move up to the 2+.
Our expectation is we continue to see that improvement in occupancy that's building that you can start to move that into, you know, the mid-2s to even towards 3% on their assets, which we think then combined with what's going on in the legacy HR portfolio can push us above the, you know, high-2s where we are now to 3+%, moving forward.
Okay. Is it in line with expectations or occupancy you said was lagging a little bit?
No, I was saying that their occupancy rebound is behind where HR was. No, in terms of what is actually their performance and what is happening is in line with what we underwrote. It was always behind, and we knew that was an opportunity coming ahead, so that hasn't changed.
Okay. Understood. Thank you for the time.
Thanks, John.
Our next question from Omotayo Okusanya from Deutsche Bank. Your line is now open.
Yes. Good afternoon. Just a quick focus on just kind of dividend policy and dividend outlook. For the quarter, if I'm looking at this right, FAD did not cover the dividend. Even when you kind of pro forma everything out, you're talking about an FAD of $0.33 and a dividend of $0.31. The coverage pretty tight. Just again, as you kind of think out over the next 12 months with some of the synergies and some of the other things going on, how should we kind of think about that going forward?
Yeah, Tayo, I think the key thing is that run rate that we've provided, you know, is really taking the current operational status, adjusting for specifics that we know on asset sales, G&A savings, interest rate impacts, obviously some non-cash as well. On FAD, it's just cash. I think our view is that the key there is it doesn't reflect any operational improvement or upside that clearly we will see playing out as we were just discussing in the quarters ahead, you know, and especially in 2023. I think that's the key. Then obviously the countervailing force is interest rates, which we talked about.
You know, I think our objective here is that, you know, we don't see a material change, but that's something we'll evaluate each quarter as we navigate, you know, this environment with interest rates and compare. You know, growth, operational growth might take, you know, a little longer, but it's recurring and it's powerful. Interest rates have moved swiftly, and that impact is pretty quick. I think you just have to balance out the two when you think about dividend policy. I think on CapEx, Kris touched on that. We don't see a material shift there on anything. The only caveat being that, you know, we might invest in some growth capital that generates occupancy upside, but that's not a permanent run rate type of conversation.
I think from a dividend policy standpoint, you know, we'll reevaluate that with the board, you know, in the coming quarter and revisit it and see where we are. But we're not, you know, we're not overly concerned at this point as to where that is. We think we've got a path to improving. I would say it's.
Gotcha. That's all.
Sure.
Okay. If I may ask a follow-up. Again, you did make some useful comments just about, you know, the hospital operator landscape and kind of what you're seeing in regards to demand. With renewals, you're kind of getting in a kind of, you know, a really good retention rate. In regards to new leasing, could you just kind of, you know, focus in a little bit more on that and just kind of how the hospital operators are kind of thinking, kind of, you know, about kind of taking up new space? I just ask that in the context of looking at your leasing velocity this quarter versus kind of like your last two quarters of the two separate entities, where it seemed like it slowed a little bit in third quarter relative to 1Q or 2Q.
Yeah. I mean, I don't think it's a material change in terms of velocity. I think we're seeing the conversations we're having, the activity level, the amount of leased but unoccupied is staying strong. So I wouldn't say we're seeing a material change. Certainly, we're mindful of the operating environment, but I think, you know, the best feedback is those conversations with whether it's physician groups or hospital groups, and that's robust. It helps to be in really attractive markets where the demographic growth is really pushing the demand. There's still a lot of pent-up need coming out of COVID to address, you know, what wasn't sort of, you know, growing in terms of space need and lease commitments, you know, for the better part of two years.
I think there's some pent-up demand there that we see that will keep that accelerating. It, you know, notwithstanding, there's labor challenges, there's cost pressures, but I think if anything, shifting more to outpatient is often the answer to the challenges that these health systems face. We don't see any slowdown on that front yet, and certainly we're mindful that, you know, there's challenges in the operating environment for our customer base.
Okay, great. Thank you.
Thanks, Tayo.
Our final question today comes from Mike Mueller from JPMorgan. Please go ahead.
Yeah. Hi. A couple questions. One, I think you touched on redevelopment before, but for new development, what sort of return hurdles do you need given, debt cost today? Do market rents, are they generally justifying the development? That's the first one. The second question is, to the extent that you can find acquisition opportunities where the math pencils out, are you seeing any, I guess, differences in terms of the mix of, you know, stuff that would fit in the JV versus on balance sheet?
Yeah. Hey, Mike, this is Rob. I'll touch on the development. I think in terms of returns on new development that makes sense right now, as we've indicated earlier, you know, we think cap rates for MOBs right now are around 6% and kind of view that as our cost of capital if we're selling assets to rotate into new developments. You know, we still look for that 100-200 basis points over and above the cost of capital today. You know, I'm kind of thinking 7% right now, today, that 7%-8%.
I think in terms of rents and can you justify that, you know, generally we're working with health systems who have growth initiatives and are eager to expand outpatient services. They're buying practices and moving them into these new locations. Oftentimes, they understand that when they have a new building that it's gonna come, you know, sort of with rates that are at the top of the market and oftentimes you're pushing the market. You know, certainly see that occurring with the development opportunities that we have where we control these opportunities through land that we own next door to the hospital and it's a great expansion plan.
Really as Todd mentioned, right now when their cost of capital is rising is really a valuable piece for them to have that they can rely on that third party capital but yet still execute on their growth plan. We think it makes a lot of sense, and that's why we, you know, continue to focus on health system relationships, deepening those relationships. When we do development, it's in line with their growth initiatives.
Mike, on your second question about acquisitions, penciling, thinking about balance sheet versus JV, I think you have to go back to a little bit what Rob said. I think right now, if you think about the balance sheet, the way we think about cost of capital, is really those disposition cap rates. Maybe that's in the 6% range. And certainly I think as the market settles out, we'll start to find some of those. You know, we certainly see them already, but as I mentioned before, we're not looking to do much in the way of acquisitions for the time being until some of this settles out a little bit and we have more clear sight on excess disposition proceeds.
I think the default is always the balance sheet, number one, but where we can make sense of JV acquisitions really and development to some extent, but focusing on acquisitions, is really using that to counterbalance sort of that, you know, sort of down the center of the fairway type of acquisition we put on our balance sheet. It's, you know, a little bit more off-campus, a little bit more value add, where we can create, you know, an extra set of returns for some of the risk profile that might come with those. We like those too, and we can do them on balance sheet, but sometimes it can make some sense. There's also sort of some geography, you know, that we try to make sense of.
Again, we're not really constrained necessarily in with our JV partners on geography, but I think to be a good partner, we wanna make sure that everything we're doing in a particular cluster, you know, we wanna be in alignment with our partner on those. We tend to try to whatever we're doing in a particular cluster, if it's in a JV already, we might do the next acquisition. Whatever the style is, whether it's value add, core, or off-campus, whatever it might be, if it's related geographically, we'll probably default to that, or at least give them an opportunity. Those are kind of the boundaries of how we think about, I think, balance sheet versus JV acquisitions.
Got it. Okay, thank you.
Thanks, Mike.
There are no further questions at this time, so I'll hand you back over to CEO Todd Meredith for closing remarks.
Thank you, Drew. Thank you everybody for joining us this morning. We appreciate everybody's time in joining us, and we look forward to seeing many of you at Nareit out in San Francisco next week. Have a great rest of your week.
That concludes today's Healthcare Realty Trust third quarter financial results. You may now disconnect your lines.